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Many small business owners complete their Paycheck Protection Program (P3) loan applications and face common questions and obstacles. The immediate question now revolves around two issues: First, how can I work with my bank or find a bank to submit it to? And second, how to correctly calculate the loan amount on demand? If you are unfamiliar with the PPP loan and how it can be used and canceled, please refer to my previous article here.
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What if my bank has still not launched its PPP application?
Most of the big banks have yet to apply for a PPP loan, and it appears that almost all of the big banks are considering doing this process entirely online and initially will only work with their existing customers from the investment banks. As of April 4, Bank of America is the only major bank to have accepted and processed PPP applications and said it accepted 85,000 applications as of Friday alone, including loans totaling $ 22 billion. They only accept applications from current clients.
Small banks, often referred to as community banks, have been the most active in submitting applications, according to Treasury Secretary Steve Mnuchin. Most banks, large and small, work first with their existing business customers. This puts many businesses that only use one bank at the mercy of that one bank. For example, if you’re banking with Wells Fargo, which hasn’t yet taken on applications, it’s not like you can just go to Bank of America now and start building their loan application.
We have seen many of our business clients at our law firm instead go to community banks or credit unions where they do not currently do banking transactions and some have found success due to relationships and network contracts, but most have heard the same bad news that even those small institutions currently only work with their existing clients. It’s complicated there, and many business owners work with every contact to find an investment banker who can submit their P3 request.
Related: 8 Ways Business Owners Can Benefit From The Federal Stimulus Package
If you have searched all of your bank contacts and your bank has not yet launched their PPP app, you may have no choice but to wait for your bank to pick up their request and process their request. This is frustrating, because many small business owners are already in financial survival mode and fear the $ 350 billion Congress funded for P3 loans will run out.
Are PPP loans first come, first served?
In its latest draft rule, the SBA answered many questions about the PPP loan with detailed answers and examples. One question answered in their final rule and the April 4 guidelines were incredibly short: “Is P3 first come, first served?” Yes. “The reality of limited funds is what causes many small business owners to scramble and beg their banks to put their apps up and running. There is a possible scenario that Bank of America and community banks could claim the all of the $ 350 billion available, as other big banks continue to delay rollout of their apps. Some of the biggest banks and their small business customers may be left behind if they are the last to put their apps up and running .
Secretary Mnuchin was asked by reporters whether the $ 350 billion was enough and replied that if the funds were depleted they would return to Congress to ask for more. President Trump echoed this message and said if funds were depleted, they would âimmediatelyâ ask for more of Congress. The initiative enjoys bipartisan support, but it is troubling for many small business owners who are already stressed about having to rely on a second bill and a funding measure to enable them to take advantage of this program. Who knows what changes or new restrictions may be included and what delays may occur?
I’m waiting for my bank to start. What do I do now?
If you are still waiting for your bank to initiate their application, I recommend that you review and complete the PPP SBA loan application even if your bank will be using an online process and application. Browsing the app now will require you to gather your records and information to correctly answer and calculate the app’s questions. While many of these questions are straightforward, such as your business name and federal employer identification number, many businesses have stumbled upon the loan amount calculation. And if you haven’t already, you’ll also want to assemble your company’s payroll records, such as your payroll reports and IRS 941 payroll statements.
How to calculate the loan amount?
The loan amount seems simple, but coming up with the right average monthly payroll is confusing. The loan amount is determined by taking the average monthly payroll for your business over the previous 12 month period and multiplying it by 2.5. In the end, the amount you will get will be 2.5 times your average monthly payroll. As we assist our law firm clients and answer questions through entrepreneur webinars, we’ve identified a few common issues that seem to stumble applicants. Let’s take a look at some of these common questions.
- My bank asked me to calculate my average payroll based on my 2019 payroll (January 1, 2019 to December 31, 2019) and not the previous 12 months (April 1, 2019 to March 31, 2020) Is this correct? The CARES law specifically states that the previous 12-month period must be used, but we find that most banks use the 2019 annual figures for salary costs because the first quarter 2020 payroll statements (Form 941) are not currently owed to the IRS, and there is no government form to verify payroll. Typically, you’re going to stick with your bank’s settings to answer this question, so if they ask for 2019, I would provide and use 2019. If your payroll from April 1, 2019 to March 31, 2020 is significantly higher, you could attempt to base your loan on these amounts, but you may need to file your first quarter 941 payroll report with the IRS now so that you have a record of this amount in your loan application. Right now we’re in limbo between who made the Q1 2020 payroll, and as a result the banks will have some inconsistency here. We believe that the time frame that banks will use will change in May once the Q1 2020 941 deadline has passed. It will be a more precise number.
- What is “payroll” and does it include wages withheld for 401 (k) or health benefits? Salary costs include salary, wages, commissions and tips, as well as vacation, medical, parental and sick pay. It also includes the payment of group health care guarantees, including paid insurance premiums. These amounts are simple. Pension benefits seem to stumble many small businesses that offer a 401 (k) or similar company pension plan.
- Do social charges include employer contributions? Yes, they should include employer contributions, as these amounts are considered “employee compensation”.
- But what about employee contributions? Yes, those amounts need to be included as well, and depending on the records and numbers you’re relying on, you might mess up this one. For example, many small business owners have relied on their 941 payroll reports in the past 12 months, as these are typically submitted with the P3 loan application to document salary costs. However, if you take box 2 of Form 941, which is wages paid, this amount does not include traditional pension plan contributions made to a 401 (k) plan or other profit sharing plans. As a result, when relying on your 941 forms, you will need to add in the traditional pension plan contributions that employees have made under 401 (k) or other plans. This is good news, as it increases your salary costs and will increase the total loan amount. There’s just one caveat here: Roth contributions or other after-tax contributions made by an employee, say to a Roth 401 (k), are not tax deductible and are already included in the Form 941 box 2 of the wages paid. Therefore, you will not add employee Roth contributions to payroll, as these amounts are already listed in the salary number in box 2 of Form 941.
- What is included in social charges? The other common mistake in calculating average labor costs concerns payroll taxes. The CARES Act and SBA guidelines make it clear that labor costs include state and local payroll taxes paid (for example, state unemployment taxes), but do not include the part paid by the employer. federal payroll taxes known as FICA (for example, payroll taxes and medicare). ).
Related: How To Get A PPP Loan And Make It Forgive
Submitting your PPP loan application is stressful and hopefully the big banks, who have millions of small business customers on hold, will have their applications up and running within days. If you are currently waiting for your bank, your best option is to contact your network and the contacts of an investment banker whose bank accepts requests. There’s not much you can do other than be ready when your bank starts accepting applications. I also highly recommend that you go through the SBA PPP loan application by doing your payroll calculations and gathering the supporting payroll records so that you are prepared and don’t get confused when applying. PPP loan from your bank will go online. And good luck.